Are investment trusts as big a deal within the Pension Schemes Bill as some members of the House of Lords seem to think they are? Pensions Expert editor Nick Reeve dons his cynical hat.
The Pension Schemes Bill continues to be debated and scrutinised by the House of Lords. Most recently, peers seem to have become stuck on the niche topic of investment trusts, or listed investment companies, and whether they should be included in the bill.
The debate centres on the wording of the controversial mandation clause. This outlines the potential inclusion of an asset allocation test within the approval process for default funds, which is linked to the scale test. “Qualifying assets” that will determine how much a default arrangement invests in the UK include private equity, private debt, venture capital, or “interests in land” (i.e. property).
Some peers are annoyed that the wording seems to exclude investment trusts. But does it? I’m convinced that this is all a bit of a fuss over nothing.
First, the bill clearly says qualifying assets “may for example be” the aforementioned private markets subsectors. But this is obviously not an exhaustive list – there’s no mention of infrastructure, a key asset class for economic growth.
Also, the bill specifies that qualifying assets “may not be securities listed on a recognised investment exchange” as per section 1005 of the Income Tax Act 2007. But this line of legislation relates only to overseas stock exchanges and specifically excludes the UK. So, as I understand it, this line means you can’t invest in stock markets outside the UK and claim that counts towards your domestic allocation.
Finally, there’s the scale question. This section of the bill specifically relates to the default investment strategies underpinning defined contribution pension schemes. Most of these arrangements will be required to hit a minimum of £25bn in assets under management, with some already having done that.
What does that scale mean for investing in listed companies? Investing even 1% of a £25bn portfolio in an investment trust will ‘move the market’ in most cases, based on the market capitalisation of most trusts (as per the Association of Investment Companies’ database). Scaling down these investments to a level that won’t massively swing share prices will likely result in tiny allocations that will have a negligible impact on investment performance.
All this within a clause that the government says it doesn’t envisage using.
Am I missing something here? It’s more than likely – if so, please feel free to contact me and put me right on this issue.
Personally, however, I would prefer the Lords committee focus on the truly impactful parts of the Pension Schemes Bill, such as guided retirement. As a Nest member, I was excited to see this week’s news that the master trust will work with Rothesay on a ground-breaking bulk deferred annuity approach as part of its port-retirement offering.
It’s always good to end on a positive note.
Nick Reeve is editor of Pensions Expert.
